Shares of Kurdistan-based Gulf Keystone Petroleum (LSE: GKP) hit new lows following the release of its annual results last week, while a payment update this week has done little to alleviate the pressure.
Meanwhile, annual results this morning from Ithaca Energy (LSE: IAE) saw the North Sea operator’s shares hold on to the gain they’ve made since a low in January.
I believe there’s a strong case for selling Gulf Keystone and buying Ithaca instead.
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It gets worse for Gulf
Gulf Keystone is drowning in debt. The company is due to repay $250m of bonds in April next year, followed by $325m in October.
But Gulf Keystone’s problems are more immediate: coupon payments of $26.4m are due in 26 days time and again on 18 October.
The company said in last week’s results that there’s “significant uncertainty as to whether cash receipts between the date of this report and 18 April 2016 will be sufficient to enable the Company to make its coupon payments” without breaching a covenant to hold a $32.5m cash reserve.
Gulf Keystone received a monthly net cash payment of $6.7m yesterday, giving it total cash of $57.2m. That will fall to $50.7m by 18 April based on this year’s running daily operating cash burn of $0.25m. The coupon payment would take cash down to $24.3m compared with the covenanted cash reserve of $32.5m, so Gulf Keystone needs a cash payment of at least $8.2m by 18 April to avoid breaching the covenant. There’s a grace period totalling 20 days, but by the end of that time operating cash burn would have added a further $5m to the cash required.
If Gulf Keystone is unable to meet its covenanted obligation, bond holders have the right to request that repayment of the $575m principal is declared immediately due and repayable.
Even if Gulf Keystone does scramble over the April hurdle, the directors expect to be unable to make the October coupon payment, let alone next year’s principal. The company says there’s a “low likelihood of an asset transaction in the near future”, which means existing shareholders likely being diluted to homeopathic levels in a restructuring involving a debt for equity swap and further equity fundraising.
The shares are trading at 7.6p, but the situation for equity holders appears so precarious that I believe selling would be the most prudent move.
It gets better for Ithaca
There was a lot to like about Ithaca’s results and outlook statement this morning. The 2015 investment programme was delivered 25% under budget, unit operating cost of $31 a barrel was a 44% improvement on the previous year, cash flow from on-going operations increased by 70%, and net debt reduced from a peak of over $800m in the first half to $665m at the year end.
For 2016, Ithaca’s Stella field is on track for first production in Q3, adding an expected initial 16,000 barrels a day to the 9,000 barrels a day from the company’s other operations. This is forecast to bring unit operating cost down to below $25 a barrel. With substantial hedging at $60-plus a barrel through to mid-2017, bank loans not maturing until September 2018 and bonds until July 2019, Ithaca’s future appears bright, if it executes on its operations and there’s not a total collapse in the price of oil.
With the shares changing hands at 32p — 46% below their 52-week high — I believe this North Sea operator could be one of the better smaller oil companies to buy in a currently troubled sector.
